Kindle Fire Boosts Amazon Digital Sales

Amazon’s first-quarter
results suggest its strategy of selling a cheap tablet computer to drive digital sales is starting to pay dividends. The e-commerce giant attributed its 19% rise in media sales during the
quarter in part to e-books, movies and music being purchased through the $199 Kindle Fire tablet it launched in November.

Said Amazon CFO Thomas Szkutak during a call with analysts:
“When you look at our North American media growth from Q4 to Q1, you're seeing that accelerate.”

As a result, Szkutak said the company would continue to add more content across all
digital categories. Amazon continued to expand its catalog of offerings in its Prime Instant Video service during the quarter, for example, through licensing agreements with Discovery Communications
and Viacom, bringing thousands of episodes from MTV, Comedy Central, Nickelodeon and the Discovery Channel.

Amazon remains tight-lipped about sales numbers for the Kindle Fire, but reiterated
that the 7-inch tablet is its top-selling product. Analysts have estimated Amazon sold about 5 million of the devices in the fourth quarter, and JP Morgan analyst Doug Anmuth has projected about 20
million will be sold in 2012.

Data released by comScore Thursday showed the Kindle Fire now accounts for more than half the Android tablet market in the U.S.; the iPad remains by far the dominant brand in the space. Apple this week said
iPad sales in its most recent quarter increased 151% to 11.8 million.

Most important for Amazon is that the Kindle Fire, and the entire Kindle line, is providing a springboard for boosting its
digital media business. Unlike Apple, Amazon is not interested in selling hardware as using its low-priced tablet and e-reader lineup as a conduit for driving additional e-commerce on handheld
devices.

“Broadly speaking, we continue to see the mobile theme benefiting e-commerce,” noted Macquarie Capital analyst Ben Schachter on Amazon’s first-quarter performance.
“The fact that the Internet is simply available more often and on better form factors is leading to increased Internet use. This is benefiting companies such as AMZN, and we expect that to
continue.”

JP Morgan’s Anmuth noted that in addition to the Kindle Fire itself, nine out of the 10 top sellers in the quarter were digital products, including e-books, movies,
music and apps. “We think Amazon's strategy of building a consumer ecosystem around the Fire and Prime appears to be taking hold and we're encouraged by consumer uptake at this point in the
Kindle Fire's lifecycle,” he stated in a research note.

Amazon did not provide specific usage-related numbers for its video service or other digital media categories, making it difficult
to get better insight into its progress in competing with iTunes, Netflix, Google Play and others. But the cost of expanding its content library, selling devices below cost and other investments have
come at the cost of operating margins, which dropped to 3.3% from 1.5% a year ago.

Still, it marked an improvement from 0.7% in the fourth quarter. Amazon overall reported a revenue increase
of 34% to $13.2 billion, while profit fell 35% to $130 on higher operating expenses. Amazon’s push behind the Kindle Fire, however, is likely only getting started.